rich to the rescue?
Source Jim Devine
Date 07/09/08/11:52

SLATE moneybox: Commentary about business and finance.

Hey, Big Spenders
Will the rich save the economy?
By Daniel Gross

Posted Friday, Sept. 7, 2007

FOR THE LAST SEVERAL years, personal consumption has accounted for
about 70 percent of gross domestic product. This decade, Americans'
preternatural ability to spend has rested on the following legs: 1)
the strong housing market, which allowed people to tap into home
equity; 2) cheap and plentiful credit for people at every rung of the
economic ladder; and 3) job growth.

As the first two legs were sawed off earlier this year, economists
argued that so long as Americans had jobs and steady incomes, they'd
spend and keep the economy humming. Friday morning's disappointing
employment report, which shows that the economy lost payroll jobs in
July for the first time in four years, indicates that a beaver is
gnawing through the last leg.

So, should we fear an impending collapse in consumer spending? Recent
sales figures from retailers like Wal-Mart, J.C. Penney, Dollar
General, and Sears have been less than encouraging. But the huge mass
retailers may not be the best indicators of overall spending. Instead,
we should probably focus on the what the rich are doing. After all,
the high and mighty account for a hugely disproportionate chunk of
consumer activity. As Citigroup equity strategist Tobias Levkovich
noted in a recent report: "The top 20 percent of American income
earners spend more in a given year than the bottom three quintiles
combined. Thus, they have far more influence on economic direction."
Levkovich points us to the Consumer Expenditure Survey data on
quintiles, which indeed shows that in 2005, the average family in the
top 20 percent spent $90,469 on consumer expenditures. The average
families in the bottom three quintiles spent a combined $87,139.

And how are the rich doing? Quite well, thank you. Median income has
been stagnant lo these many years, as the Census Bureau reported last
month, and it is still below the level of 1999. But as David Cay
Johnston reported (article purchase required) in the New York Times
last month, people making more than $1 million "reaped almost 47
percent of the total income gains in 2005, compared with 2000" and
"received 62 percent of the savings from the reduced tax rates on
long-term capital gains and dividends that President Bush signed into
law in 2003." Jonathan Chait's excellent new book, The Big Con,
smartly argues that such outcomes are the intentional results of
economic policies designed to redistribute income upward. (Few members
of the Bush economic team will cop to the intent.)

In theory, the rich, and the ultra-rich, are subject to some of the
same economic woes that trouble the middle class: the slumping housing
market, the rising cost of credit, and job insecurity. But they aren't
showing many signs of stress. Some hedge funds have imploded, and a
few investment bankers have lost their jobs, but financial-services
job losses have thus far been contained to the rank-and-file employees
of subprime lenders. Bonuses at Wall Street may be down this year, but
many investment bankers are clearly still spending last year's haul.

At Saks, same-store sales in August were up a stunning 18.2 percent;
at Tiffany, same-store U.S. sales rose 17 percent in the second
quarter. Indeed, luxury retailers are in an expansive mood. The Wall
Street Journal reported earlier this week (subscription required) that
"this year, some 30 high-end retailers have opened boutiques in Austin
[Texas], including Tiffany & Co., Michael Kors, Ralph Lauren, David
Yurman, Louis Vuitton and Burberry." These stores are located in a new
mall anchored by Neiman Marcus, where same-store sales rose a healthy
4.6 percent in August. Among the strongest performers: "designer
handbags, shoes, designer jewelry, women's fine apparel, and men's."

Nationwide, the housing sales market may be a bust. But the Journal
reports (subscription required) Friday morning that while many
California housing markets suffer, "[e]ye-popping sales are spreading
along a 40-mile stretch of southern Santa Barbara County." In July,
sales in the area, "the only region of California where the median
sales prices surpassed $1 million," rose nearly 28 percent. Publicly
held home builders that cater to middle-class buyers are faring
poorly. But the very wealthy are still building. This
50,000-square-foot home under construction in West Hartford, Ct., is
worth 20 starter homes—and probably more, given the amenities. Or take
personal transport. While auto sales are down, "the market for private
jets is stronger than it has ever been," said Richard Aboulafia,
analyst at the Teal Group. Economically speaking, a Gulfstream G550,
which is made in the United States and goes for $48 million, is worth
the equivalent of 3,200 Ford Focus coupes, which go for about $15,000

Given the top-heaviness of the economy, one could make the case—one
could, but I'm not—that the continuing upward redistribution of income
is good for the economy and good for all of us. As they earn more, and
keep more of their income, the rich and the very rich spend more, thus
keeping the growing number of residents of Richistan gainfully
employed. The fact that the rich are getting richer is one of the
reasons that federal tax revenues—which are much less progressive than
they were in 2000 but still somewhat progressive—are growing so
smartly, up 7.4 percent year over year. Today, analysts are likely
sifting through the jobs report and ratcheting down their forecasts
for the Christmas season. It may well turn out to be a glum one for
many retailers. But as long as the lights are on in the mansion on the
top of the hill, the growing number of stores and businesses that
cater to their residents will be busy.

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